Stock prices took off with a bang this year with huge gains on the first day of trading followed by five more consecutive up days. Only four times in the last 82 years has the S&P 500 Index started a year with five consecutive up days, let alone six consecutive up days. So there was no telling where the market was heading, but there are ways to get some clues.

According to the 2010 Stock Trader's Almanac's First Five-Day Indicator, the S&P 500 will end the year higher when the S&P 500 goes higher in the first five days of trading. The S&P 500 has gone up 31 times in the last 36 years and the S&P 500 has ended the year higher 86.1% of the time. The average gain for all 36 years is 13.7%. Not bad. So things were looking very good for 2010 after the first full week trading. But the S&P 500 went down on January 12th; then again on January 15th, and, my goodness, three more times on January 20th, 21st and 22nd; then two more times on January 26th and 28th. Now the delicious gain after the first six days is gone and the S&P 500 is even down from its December 31, 2009 close. So what's the market going to do now?

Well, let's see. The Stock Trader's Almanac says the January Five-Day Indicator has a spotty record - almost a contrary indicator in midterm election years. In the last 15 midterm years, only seven entire years followed the direction of the First-Five Days and only one of the last eight, 2006. The full-month January Barometer has a much better midterm record of 66.7% accurate. In other words, 10 of the last 15 midterm election years followed January's direction. Every down January on the S&P 500 since 1950, without exception, preceded a new or extended bear market, a flat market, or a 10% correction.

Wow, this doesn't sound good. What does it mean? First of all, it says that since the S&P 500 went up during the first five days of January, the Indicator (which is pretty unreliable and has acted like a contrary indicator in midterm elections) is pointing to a down year. Since the S&P 500 is down for the full month, there's a 66.7% chance that the S&P 500 will end the year lower than 2009's close of 1115.10. Moreover, the bear market will have been extended, or the market will have been flat or experienced a 10% correction, if the S&P 500 does close the year lower.

OK, so that's what the Stock Trader's Almanac says, but what do I think? Well I'm not quite that gloomy and the main reason is that S&P 500 Earnings have been rising and our trend indicator of S&P 500 Earnings, as shown in the Market Climate Graph, is about to go above 1.00. My belief is that stock prices will rise as long as earnings continue to go higher. Sure, we could have a 10% correction, but rising earnings will trump The January Barometer.

HOW TO TRADE CONTRA ETFS.
The market has been nasty lately, punishing stocks with good earnings as well as bad, so we finally caved in and started buying Contra ETFs. If you are not familiar with these stocks, you must see this week's "Strategy of the Week" video. Please join Mr. Todd Shaffer, Senior Instructor and Product Support Consultant, at the VectorVest University to see this week's very important presentation: "How to Trade Contra ETFs."

Last week I said that I wanted to take "a more flexible, natural course" to managing the Model Portfolios. This doesn't mean that we're going to discard all the rules and techniques we have used in the past, but with four portfolios, three prudent and one aggressive, being illustrated, it makes sense to focus more on the techniques Prudent and End-of-Day Investors could use in building and managing their portfolios as compared to those that Aggressive Investors and Traders might use. Here are the guidelines of how I plan to manage these portfolios:

WHEN TO BUY. VectorVest believes in buying rising stocks in rising markets, so we will continue to use the VectorVest Market Timing System for guidance on market direction. We will always plan to buy stocks long when the Primary Wave is Up. Occasionally, however, if we think a rally is imminent, we may plan to buy stocks long even when the Primary Wave is Dn.

Before the market opens, we will always check the stock Futures to see if the likely direction of stock prices is in agreement with our plan. If it is, we will proceed with our plan. If the direction of the Futures is not in agreement with our plan, we will wait to see what the market does at the Open. If the Futures indicate that the market is likely to make a big move contrary to our plan, we may abort the plan. End-of-Day Investors should check the Futures as close to the open as you can before placing your orders.

After the market opens, we will make a final assessment of market direction by waiting until the DJI, SPX, and IXIC are all higher than their previous day's close before buying any stocks long.

WHAT TO BUY. Whenever a new campaign is launched, we will recommend at least three Strategies which we deem appropriate for each portfolio. The reason for recommending more than one Strategy for each portfolio is to avoid a stampede into the stocks that a single Strategy would return.

Once we have decided to enter the market, we will select stocks from the top 10 stocks returned by the best performing Strategy, i.e., the one showing the best combination of percent price gain and percent winners. We will buy a stock only if its price is higher than its previous day's High. End-of-Day Investors may use "Buy-Stop-Limit" orders to emulate this technique. See my essay of December 24, 2009 on how to do this.

Although we have traditionally used model portfolios with 10 stock positions in them, we will build some portfolios with up to 20 stock positions because portfolios with 20 positions not only allow more diversification but they also allow the use of a 20% Stop-Loss instead of a 10% Stop-Loss without increasing single-stock risk. Moreover, portfolios with 20 stock, 20% Stop-Loss portfolios frequently perform better than 10 stock, 10% Stop-Loss portfolios.

WHEN TO SELL. Stop-Prices are the first line of defense on when to sell a stock. VectorVest gives a Stop-Price on every stock, every day. These are designed for Prudent Investors, not Traders. Even so, we generally will start out with a 10% Trailing Stop on new positions because we don't want to risk more than 1% of our portfolio value on any single stock position. We often will tighten our Stops when we see the market heading south, i.e., the Primary Wave turns from Up to Dn.

Traditionally, we have exited all long positions by the time the Price of the VectorVest Composite has given a C/Dn signal. We will continue this practice for the Riding-the-Wave and the Yellow Brick Road Portfolios. We will not feel compelled to exit all positions in the High Income and Premier Growth Stocks portfolios because we view these portfolios as suitable for less active investors. However, we will not violate the Stop-Loss criteria we have set for these portfolios.

WHEN TO GO SHORT. We will continue to go short in the Riding-the-Wave portfolio upon receiving a C/Dn signal. We may or may not go short in the Yellow Brick Road portfolio, depending upon market conditions. We will not go short in the High Income and Premier Growth Stocks portfolios.

I'm sure there's more I should have put into this essay, but we will learn what that is as we go forward, Managing the Model Portfolios.

LOW COST INSURANCE - THE COLLAR OPTION.
Many investors have racked up large unrealized profits in their stock portfolios recently, leading many of them to ask, "How can I protect these profits with the increasing uncertainty in the markets lately?" Please join Mr. David Thornton, Director of Sales and Marketing, at the VectorVest University to see this week's terrific "Strategy of the Week" presentation: "Low Cost Insurance - The Collar Option."

You know you're in a tough business when you have a portfolio that was up 85% for the year and you still receive complaints about its performance. Specifically, I've received a number of emails asking why the "Riding-the-Wave," (RTW) 2009 Model Portfolio performed so poorly over the last six months of the year. It peaked at 115.47% on 06/22/09 and ended the year with an 85.02% gain.

I agree, the portfolio's performance wasn't very good in the second half of the year. But one email went so far as to ask if it's even possible to make money in a Bull market with VectorVest. I had to hold myself back on answering that one, but anyone who could parse the 2009 portfolio to kingdom come, as the writer did, could have easily seen that every Riding-the-Wave portfolio since 2005 was up nicely, and the average annual gain over the five year period was 76.3%. So it is possible and even probable that you could and would make money with VectorVest in any kind of market.

In regard to the first issue, i.e., the poor performance of the 2009 RTW portfolio in the last six months, there's a long explanation and a short explanation. The short answer is that we were victimized by our own success. What I mean is that so many of our subscribers were buying the stocks that I was expected to buy, thereby driving up prices before I bought them, that I was buying at artificially high prices. Then, the next day, many subscribers saw what I bought and charged into those stocks, driving them even higher. So in two days, one could easily have had a 10 to 20% gain, causing them to take profits and killing the stocks I had purchased. The net result is that I would make very little or no money or lose money on the round trip over and over again. Check it out for yourself, every trade is documented in the Trade History Report of the 2009 RTW portfolio.

Over the years, we have taken a number of steps to avoid moving the market. When we first created the Model Portfolio, we would say "we're going to go long (or short) tomorrow with such and such a Strategy," and we would do this regardless of what the market did. This worked pretty well when we were still small, but as we grew in size, we began to notice that the stocks in the Strategy we had selected had popped at the Open. Ultimately, it got to the point that they would be up sharply, as much as 60%, at the Open. But we bought them anyway, since we had said we were going to go long. This often led to substantial losses because the stocks, which had gapped higher at the Open, usually pulled back during the day as traders took their profits.

To solve this problem, we began to say we would go long (or short) with any one of five designated Strategies. This tactic worked quite well, but it led to an endless flood of questions, such as, how did we select the one Strategy that we went long (or short) with. Once we explained that we picked the Strategy that was performing the best, we saw some signs that we were still moving the market, but it wasn't too bad.

While this was going on, we learned that it was silly to commit to going long (or short) the next day when the market didn't always do what we thought it was going to do. So we began to say "we would go long (or short) if the market moved sharply higher (or lower) the next day." This technique ultimately led to the rule of defining a sharp move as one in which the Major Indexes, i.e., the DJI, SPX and IXIC, were all up (or down) by at least 1%.

There's more to this story, such as watching the direction of the futures, not trading before 10:00 AM and so on. The net result of all this was that I became bound by a set of rules that severely restricted what and when I could trade and the portfolio's performance suffered. I didn't like it and seriously thought about scrapping the whole idea of having a model portfolio.

But I decided against that. Managing the Model Portfolio had actually helped make me a better trader and I know it has helped thousands of our subscribers learn some good techniques and also become better traders. So I decided to go with the idea of taking a more flexible, natural course, which I'll describe further next week, to managing The Model Portfolios.

DEALER'S CHOICE.
While preparing the training material for our new course, "Trade Like a Pro," we noticed that there are some very good professional traders who like to buy on strength and sell on weakness, and others who do the opposite, i.e., buy on weakness and sell on strength. While VectorVest belongs in the former camp, we thought it would be worth conducting some head-to-head tests to see which technique gave better results. Mr. Glenn Tompkins, Manager of Internal Training, ran the tests and came up with some very interesting results. Please join Mr. Tompkins at the VectorVest University to see this week's revealing "Strategy of the Week" presentation: "Dealer's Choice."

TRADE LIKE A PRO.
If you are in or around the Vancouver area in late January, you've got to attend our new course, "Trade Like a Pro." We're very excited about it and believe it will be well worth your while to attend. I can assure you that you will learn things that would cost you thousands of dollars to learn elsewhere. Although we'll be using VectorVest RealTime as the platform, the strategies and trading techniques we describe can also be used by end-of-day traders. Don't delay, read all about it above and sign up now.

TRADERS EXPO OPTIONS COURSE.
VectorVest has been invited to offer its Options Course at the upcoming Traders Expo in New York City on Sunday, February 14, 2010. This will be the same course described in my essay of July 2, 2009, so you'll be able to get the same great offer to attend that we made then, but even better. In addition to the Early Bird registration fee of only $445.00 per person, you will receive a $50.00 Saving Certificate from VectorVest, which is good on any VectorVest product or service. You must register before January 28, 2010 to get the Early Bird rate. Details are shown above and I hope to see you there.

Last week I said that my goal for 2010 was to help you learn an end-of-day stock selection and portfolio management system that was consistently profitable and easy to do. The "Green Light Buyer" technique, introduced in my August 21, 2009 essay, was a major step in this direction. It is based upon the idea of buying rising stocks in a rising market, and our tests have shown that it consistently produced profits and was very easy to do.

However, it still left the end-of-day trader, a.k.a., The Midnight Cowboy, in the position of assuming that the market would go up the next day. While the odds of having an up day the day after receiving a green light in the Price column of the Color Guard would be in your favor, there are no guarantees that an up day would actually occur. Therefore, we have urged you to check the stock futures before the market opens to get a better idea of the market's likely direction.

In addition to checking the Color Guard and the stock futures, we also suggested using the technique of buying stocks only when they have gone above their previous day's high. The benefit of this technique, i.e., ensuring that you are buying rising stocks, was illustrated in the "Strategy of the Week" presentations of 11/27/09 and 12/18/09. We explained how an end-of-day trader might execute these trades by placing Buy Stop Limit orders on 12/24/2009.

Last week, I introduced a new Strategy, "Higher Ups," that finds top VST stocks that have gone above their previous day's high. "Higher Ups" is an intriguing little Strategy but I found it to be too restrictive in that it looked at only five stocks and required a stock's price go more than 1% above the previous day's high. So I created a new, but similar, search which looks at the top 10 VST stocks and removes the 1% requirement. I called it "Higher Highs" and we put it into the Strategies - Price Volume Group of the UniSearch tool.

Although these Strategies were created with the thought of helping end-of-day traders, I have found the "Higher Highs" strategy to be extremely useful in working with VectorVest RealTime. To be clear, end-of-day traders must select their stocks and place their orders before the market opens, but users of VectorVest RealTime can run their Strategies, modified to find higher highs, any time they wish and immediately see which stocks are hitting Higher Highs.

USING HIGHER HIGHS IN VECTORVEST REALTIME.
To see exactly how the "Higher Highs" strategy works, what it does and what you can do with it, please join Mr. Dan Misch, Instructor and Product Support Representative, at the VectorVest University to see this week's terrific "Strategy of the Week" presentation: "Using Higher Highs in VectorVest RealTime."